Wednesday, 26 July 2017

Don't be a player hater

A column from me in the Local Government Business Forum's newsletter:

Rapper Ice-T isn’t a conventional source of policy advice. But he was right about one big thing: don’t hate the player, hate the game.

Local government too often makes it hard for business to get things done. And as far as much of central government is concerned, local government can barely be trusted to get the mayor’s shoes tied, never mind run anything else.

Relations between central and local government have been strained for a while. Local government often makes decisions that are hardly in the national interest. Auckland’s housing crisis stems from decades of planning and consenting decisions made by local councils that stymied growth. The consequences matter for the whole country, from macroeconomic monetary policy to dismal productivity statistics.

And, from central government’s perspective, local government too often comes cap-in-hand for funding that should be covered by rates.

But look to the incentives facing local councils: the game.

Don’t hate da playa

A council that facilitates growth, runs superb consenting processes, and lays out infrastructure for new development may see little reward for its efforts. Rates from new ratepayers will largely be eaten up by the costs of new infrastructure. And the council budget process makes the remaining contributions of those new ratepayers a bit harder to see: councils decide what to spend, then divvy it up across their ratings base.

Outcomes are then not particularly surprising. If councils bear most of the costs of growth, and central government sees most of the revenue boost when councils facilitate growth, the game will automatically lead to conflict.

But it gets worse. Central government mandates often require local councils to bear costs, without an accompanying revenue stream. This blurs lines of accountability for councils: poorly performing councils can blame central government for its cost impositions – and be at least partially right. And strong performers can be punished when voters see rates increases for which their council really is not to blame. 

You can find the whole thing here (pdf). Note that it was written about a month ago, so doesn't capture the effects of this weekend's announced infrastructure funding changes. I covered similar housing themes on Nights last night with Bryan Crump.

Thursday, 20 July 2017

Get on with it: housing edition

Superu says that land use restrictions contribute to 56% of the cost of a house in Auckland.

They don't provide their background workings, so I can't verify the numbers. But if they're close to right, this is a pretty strong indictment of the last decade of government. National has had almost a decade to fix this mess. Sure, they'll blame their coalition partners for not letting them change the RMA, but they had chances to do it before National lost Northland.

And there are plenty of non-RMA things they could have done too. Councils use the flexibility within the RMA to set restrictive district plans because it's generally in their financial interest to do so. Central government could change that without touching the RMA. Councils hitting their debt limits can't finance the infrastructure needed for long-term growth, even if that infrastructure easily passes normal cost-benefit assessment.

Things this government has failed to do to encourage housing affordability, and it has been almost a decade now:

  • RMA reform;
  • Enabling municipal utility districts to impose special levies in new developments to finance infrastructure: it's how tons of new development in Texas gets financed, and how they maintain housing affordability. You can do it through that kind of MUD structure; you can do it with other structures that finance infrastructure through targeted levies that are kept separate from Council's balance sheets;
  • Punting the GST from new construction back to Councils to help them defray infrastructure costs;
  • Abolish rural-urban boundaries;
  • Tie Council ability to set restrictive urban plans to existing measures of housing affordability. Stuff like "You can set whatever district plans you like, but if the median house price is more than five times the median household income, we will automatically ratchet up the allowed density across the whole city, abolish heritage preservation districts that mostly work as ways for old rich people to keep away the kinds of people they don't like, and abolish urban growth boundaries. Have fun."
Lots of stuff government could have done, and should have done earlier. Lots of stuff government still can do. Get on with it already. 

Wednesday, 19 July 2017

A young adult UBI?

Gareth Morgan's party proposes $3.4b to go to everyone aged 18-23 as $10k after tax transfer – a limited UBI.

I had a short chat with The Project about it yesterday; the logistics didn't work out for a longer chat as I was out to Christchurch to help launch an excellent new book on smart water markets - more on that another time. I'd put together a few notes in case I was to have had a longer chat; I'll share those here.

The bulk of Morgan's proposal would be funded by cancelling National's tax package, with minor bits coming from forecast future surpluses ($400m), canning student allowances and student loan living costs for folks in that age cohort (maybe $267m they think), and job-seeker support for those in that age cohort.

I don't know how this interacts with WFF and consequent fiscal effect. Some of the benefit could be clawed back - with potentially lower fiscal cost.

The bulk of the cost comes from cancelling National’s tax package. That package pushed out the income tax thresholds for the two lower tax boundaries. So providing funds to those 18-23 is at the expense of reduced taxes for every other cohort.

National’s tax package bumped up the accommodation benefit for students and hiked the accommodation supplement. In current rental markets, that programme would mostly subsidise landlords rather than help tenants; just giving that money as cash transfer to 18-23 year olds may not be all that bad.

More generally, there are two basic ways of trying to provide income support. Targeted programmes, like those that the government currently runs, and like those it will be further developing as part of the investment approach, seek to direct funds to particular sorts of need. They get messy and complicated very quickly as necessary part of targeting, and the rules can often feel perverse. If you want to make sure that kids in households with the least support get the most help, you need checks around what kinds of support are available in the household – and that’s where all of the monitoring stuff around live-in partners and the like comes in.

These programmes are able to deliver targeted benefits at tolerable cost, focused most closely on areas of greatest identified need. And the Investment Approach will ramp all of that up to direct funds to programmes that do the most good in improving lives, as measured by reduced reliance on benefits. Note that the object there isn’t the reduced reliance on benefits but that it’s a signal of other things having gone wrong.

A UBI is at the opposite end of the scale. It provides blanket payments to everybody regardless of need. The UBI forgoes targeting in favour of simplicity, but at the expense of high cost. So while a UBI would reduce the high EMTRs facing a lot of people on multiple benefits who are working 20-30 hours per week, where combined clawback rates can mean that workers only keep 10 cents or less from each dollar earned (in some cases), it is at the expense of higher EMTRs for all other earners. And then the net effect depends on whether you do more good by reducing large perverse incentives for a small group of people, or by avoiding (relatively) smaller perverse incentives for a much larger group of people.

TOP is right to point to the unfairness of some of the support provided to students that is not provided to others starting out in the workforce. They propose taking away some of the extra support provided to tertiary students (though fall short of re-introducing interest on student loans, which they should have), but apply the savings to a blanket payment to everyone aged 18-23 regardless of need.

And where they've maintained benefit payments above $10k for those currently in receipt of benefit packages over $10k, they've also maintained some of the costly hoop-jumping (and high EMTRs) that are part of the costs of the current system.

As for incentive effects and work, here's a recent evaluation of what happened in Manitoba's Mincome experiment.
Thus, Figure 5 graphs overall trajectories in order to get a general picture of subgroup trends. Subgroups are displayed as baseline and study period averages for ease of presentation, and treatment effects are shown in parentheses in Figure 5. Among the most consequential, Mincome’s average treatment effect (the difference between changes in Dauphin and changes in the Manitoba control) for singles is a 16.2 percentage point fall in household participation in the labor market. Among young people there is a similarly large treatment effect, at 18.6 percentage points. Dual-headed households appear less sensitive to Mincome. For this group, the equivalent treatment effect is 7.4 percentage points. Thus, the overall experimental effect on labor market participation is disproportionately driven by changes in young and single-headed households.
So the biggest drop in labour market participation was among youths. 

Dauphin's guaranteed family income started at $19,500: about half of annual household income at the time. Morgan's proposed $10,000 is much lower than that relative to median household income in New Zealand, so corresponding effects on labour market participation would be expected to be lower than those found in Manitoba.

While the authors note that drops in participation would not be large enough to cause problems in overall scheme financing, note that Mincome wasn't self-financing. Lots of people in Dauphin weren't in the experiment, and the money for the experiment came from overall government revenues. 

That makes it harder to tell what the real effect on participation would be. On the one hand, you might expect people who wanted to be able to drop out of the labour force would be disproportionately willing to participate in the experiment, which would mean the found effect is larger than you might expect for the population overall. On the other hand, you might expect that if everyone faced the kinds of tax rates necessary to fund a UBI scheme, dropping out of work for current workers would look more attractive. In that case, you'd expect real-world effects to be larger than those found in Mincome for payments comparable to those used in Mincome. 

Tuesday, 18 July 2017

Water Markets - back to the Staff Club

I'll be back in Christchurch late this afternoon to help launch an excellent book by John Raffensperger and Mark Milne on smart markets for water. I'm a big fan of their work, and the book is excellent. It even has a foreword by one of the godfathers of smart market design, Vernon Smith.

Here's the invitation blurb; please do RSVP if you'll be attending so they don't wind up over capacity. I think they had room for about 8 more as of yesterday.
Increasing pressure on water resources means that society needs to be smarter.  New technologies can combine with market approaches to get more value from water while better protecting the environment.  Join the Waterways Centre for Freshwater Management in the release of a book on one new technology, Smart Markets for Water Resources: A Manual for Implementation. The book is co-authored by John Raffensperger (now at Rand Corp.) and Waterways member Mark Milke.

The event provides an opportunity to look forward to better incorporating new technologies and market approaches in water resource management. Dr Eric Crampton, Chief Economist at the New Zealand Initiative, will open with a short presentation regarding the role of markets in freshwater management.

Tuesday, July 18, 20175:30 – 7:00 pm
Upstairs, Ilam Homestead
University of Canterbury
Nibbles provided and drinks are available at the Staff Club Bar downstairs.

About Dr Eric Crampton: Dr Eric Crampton is the Chief Economist at The New Zealand Initiative. He served as Lecturer and Senior Lecturer in Economics at the Department of Economics & Finance at the University of Canterbury from November 2003 until July 2014. He is also the creator and author of the well-known blog "Offsetting Behaviour". He has written on water pricing in popular media outlets including the National Business Review and the Christchurch Press.

About Smart Markets for Water Resources: Water markets have not realised their potential because of high transaction costs and the problem of the interaction of users’ environmental effects. The book examines an elegant solution -- the smart market. It covers the prerequisites that must be in place before the market can begin. It describes how the market would be structured and how it would operate, for different types of hydrology. It discusses matters ranging from common objections to water markets to the layout of the market operator's databases.  More than an academic analysis, the book is manual to be used as a starting point for implementation.

All are welcome – please email suellen.knopick@canterbury.ac.nz to RSVP.

Hope to see a few old Staff Club friends there. It's the place the kids have missed most since moving to Wellington.

Monday, 17 July 2017

Green investment

I'm having a hard time seeing the point of the Greens' proposed new government-backed green-tech investment fund.

Here's their description:
In our first term of Government, the Green Party will:
  • Establish a government-owned, independent, for profit Green Infrastructure Fund with a social and environmental purpose, to act as a magnet attracting private finance to transformational low carbon, climate resilient projects.
  • The Fund will kick-start new clean infrastructure projects like solar and wind power installations, energy efficient buildings, biofuels, and other clean technologies.
  • The Fund will have a minimum target rate of return of 7 percent, an annual emissions reduction goal of one million tonnes of CO2, and generate thousands of new jobs.
  • It will cost $110 million over three years to be initially paid for by raising oil royalty rates from 46 percent to the international average rate of 70 percent.
Their full policy document points to what they see as the problem:
Without the right policy, price signals, and supportive partner institutions in place, private capital has continued to fund carbon and resource intense investments, while starving the emerging cleantech sector of the capital it needs to thrive.
I can understand there being a lack of investment in some tech, and overinvestment in others, if the price on carbon isn't right. But if that's the problem, and if the Greens are proposing the right price for carbon, then the fund isn't really needed: investors would shift over as the price signal changes. If the projects can earn a 7% return and aren't more risky than other comparable investments, I don't know why government kick-starts are needed.

Radio New Zealand called me for comment on the thing on Saturday; here's what I sent through. I recorded an interview on those themes; not sure if it aired as I was out with the kids Sunday.

  1. If there are green-tech investments out there able to earn a minimum 5% rate of return, or a targeted 7-8% rate of return, what barriers exist that currently block that investment in New Zealand? We keep being told that the world is awash in capital, with loads of savings looking for relatively safe homes with reasonable returns. What problem is the fund then trying to solve?
  2. If the barrier to green-tech investment is that returns are too low because the right price signals are not in place, it's still not clear what problem the fund solves. If the price signals aren't there, then the government's $100m won't find projects yielding returns and private capital won't join it; if the Greens put in place higher carbon charges that would make some green-tech investment feasible in New Zealand, again the fund wouldn't be needed as there would be private capital already ready to make the investment. The document says that clean tech's benefits aren't always captured by investors so government is needed - if that's right, isn't it more appropriate for government to be taxing pollution and then letting investors work out for themselves what works best to solve things?
  3. It is odd for an investment fund to have a job-creation goal in addition to rate of return on investment. That wind turbines employ a lot of wind turbine technicians isn't a good reason to invest in them. If they happen to employ a lot of technicians while still producing electricity cheaply, that's something different. I hope the bullet point on job creation is an ancillary by-product of the investment rather than the point of it. Note too though that if those skilled technicians are necessary for the projects to go forward, and if New Zealand doesn't have them already (or enough of them), well, we're already at very very high employment rates - would we be then importing workers to do it, or would this be a longer-term thing where they'd plan on putting in new training programmes for very specialised jobs? If it's the latter, that's risky too: the price of solar (I think!) is dropping faster than the price of wind power; what happens if the government encourages a pile of kids to train up to be wind technicians and the next year, everybody's installing Tesla solar roofs, the price of power drops, and wind farms are no longer viable?
  4. The proposal suggests funding projects like house retrofits, or innovative diversions from landfill. None of those make sense as investment projects. Homeowners can already borrow at the mortgage rate to fund house insulation projects, or lighting retrofits, or whatever. If that lending were less risky than the mortgage rate, banks would be competing already to provide funding for those projects at the lower interest rate. So what would this fund then do: provide loans to homeowners to put in insulation and the like, and charge a lower interest rate than the banks? Why would private investors stump money for that when they could buy shares in banks instead? Similarly, landfill remains remarkably cost-effective.
  5. The way solar prices are dropping, I'd put reasonable odds on NZ hitting a 100% renewable electricity target (or darned close to it - maybe one other plant sticking around for emergency peaking demand) by 2030 even without a drop of government money going in. Have you seen the new Tesla roofs? They're already advertising as cost-competitive with traditional roofing materials; they'll be available from next year. Give it a decade and all the new roofs going in, and roof replacements, will be solar plants - unless the price of electricity drops faster than the price of these distributed generation panels. I also wonder a bit about the point of biofuels once we're at that point (although there's really cool stuff on the horizon from algae).
  6. Kick-starting the fund by hiking oil royalty rates may be risky. I haven't had time to check into it, and won't have time to, but surely folks who have sunk capital into building offshore wells would have signed contracts specifying the royalty rates, right? It would be pretty surprising if anybody were willing to put in tens of millions in investment if they thought the government could wipe out the returns by hiking the royalty rates quickly. And if it had to raise the funds by hiking royalty rates on new drilling, well, there hasn't been all that much interest in drilling even at current royalty rates. 

Tuesday, 11 July 2017

Coalitions

Peter Ellis's NZ election simulations show a 58% chance that any coalition would require New Zealand First in it. 


So 58% chance that Winston is in either coalition, and an additional 6% chance that Winston makes the tie that puts a Winston-Labour coalition neck-and-neck with National's coalition.

So there looks to be zero chance of Labour's being able to put together a coalition that does not involve New Zealand First. But there's reasonable chance that National could.

There are some New Zealand First policies I like. I think the version they've been pitching for shunting some GST revenues back to Councils is completely unworkable, but there are workable ways of achieving that objective - and finding better ways of funding Councils and improving their incentives is rather important. NZ First is more sympathetic than most parties to devolution as well.

But if New Zealand First's strong anti-immigration position is your biggest concern, I think that has to argue for a strategic vote for one of National's current coalition partners that has been pro-immigration: ACT, United Future, or potentially The Maori Party with Carrie Stoddart-Smith now there as candidate.

Voters of the left who are pro-immigration will have a difficult time this go-round.

Monday, 10 July 2017

Counting calories

Alcoholic beverages in New Zealand don't require nutritional labeling. It's an anomaly relative to other food and drink, but does it make sense to add labeling requirements to alcohol just to have consistency across products?

I'd missed NZIER's assessment when it came out but had it pointed to me last week.

NZIER carefully goes through the complicated chains necessary for labeling to have an effect, and why the likelihood of any effect at all is very small, and how the international studies struggle to find any effect. Because they look not to have been able to see any way of finding an effect, they instead asked a different question: How big would the reduction in obesity have to be for compulsory labeling to pass cost-benefit?

After answering that question, they warn that their numbers are likely to be lower bound figures: more people would likely need to shift weight as consequence of the rule than they're expecting. Why? Because the obesity cost estimates are an average over the category, and those at the thinner end of the category (and less expensive end) might be the ones more likely to shift. I'd also want to check whether the obesity cost figure is incremental to any overweight cost figure, or is the total cost of being in the category relative to someone of normal BMI - because otherwise benefits may again be overstated.

They benchmark cost-effectiveness not against any cost-benefit analysis, but against existing programmes. Health Star was justified on similar basis, they report, and it was estimated to be cost-effective if obesity and overweight dropped by 0.04%, or 1513 people per year. Even that isn't a clean comparison though because the Health Star figure looked at changes in obesity and overweight, not just obesity; this study just looks at obesity.

And their winding up is pretty clear on the caveats. They give zero assessment of whether the policy would be cost effective, just the number of people, as a minimum, who would have to stop being obese as consequence of the policy for the policy to be effective. They provide no indication of whether that number could be expected to be reached, and specifically note that they cannot estimate it because there is no basis on which they could do so. And while they include some high-benefit cases based on purported welfare effects of obesity rather than just fiscal cost, they also have a whole appendix section on why they think those costs are overestimated.

One caveat they didn't put up: you can get perverse effects if you mandate putting up calorie counts while banning advertising of health benefits of moderate consumption. Other foods that have positive health consequences for moderate consumption at least can let people know about it.

Consider the kind of person who has zero clue that alcohol contains calories. If we have low information consumers, why would we expect them to be poorly informed only on the calories margin? Suppose that person also does not know that moderate drinking reduces all-source mortality risk by 16% or thereabouts, but has heard the repeated warnings about heavy drinking. Our consumer, let's say, is consuming 3 standard drinks per week and, after hearing about the calories, drops to 2. Knowing about the health benefits of moderate drinking but not the calorie count might have had the person shift from 3 to 4; knowing about health benefits and calories might have had the person stand pat at 3.

If health-conscious but poorly informed people who read labels are the ones most likely to change behaviour, they're less likely to be heavy drinkers to start with (because they're health conscious). If that's the case, then labeling could have the perverse effect of most substantially reducing consumption among the cohort receiving net health benefits from consumption, and that effect would need to be weighed in (and is here ignored).

It would be mildly fun to do the same extreme bounds style analysis to show how many thin moderate drinkers would need to shift to abstinence for every obese person who became not-obese for the policy to wind up doing harm.

I also wonder about trade effects if imported products would be subject to compulsory labeling but are not currently labeled. We could then be back in the annoying case where importers have to stick stupid labels on everything, like they do for standard drink counts. I don't know whether places from which we currently import have labeling requirements that would conform to what NZ/AUS would be thinking about, or whether this would be additional. NZIER notes no trade hassles if the thing's non-discriminatory, but you could get effects on competition and reduced access to imported products, which would have harms for consumers.

In any case, it's tough to see any strong case for mandatory labeling in that report.